But why? The easiest explanation to discard is that, in a
race to the bottom, states have reduced corporate income-tax (SCIT) rates. They
haven’t. Marginal SCIT rates have been more or less constant for more than 30
years.

Me? I attribute the decline in SCIT to increased tax
avoidance/evasion. Tax avoidance/evasion isn’t a new enterprise, but its
direction and focus changed dramatically after 1980 and it has been growing in
size and sophistication ever since. The simple fact is that it is ridiculously
easy for multi-state businesses to shelter profits from SCITs, reporting them
where state corporate income-tax rates are low (in states like Nevada or
Washington) and avoiding them in high-tax states (like Pennsylvania or Iowa).
These days, this can be done with a couple of mouse clicks (and some accounting
and legal legerdemain). Unfortunately, it’s hard to fix tax avoidance/evasion
mechanisms or even say which ones matter most at the state level. Multi-state
businesses are not required to publicly report the income taxes they pay in
each state, just the total.

Many of our colleagues deny that the massive decline in the
weight of state SCIT revenue (which is itself unquestioned) is due to increased
tax avoidance/evasion. They note that enactment of the pass-through provision
in 1986 and its subsequent expansions have fundamentally transformed the
business landscape in America, leading to a decline in C-corporations relative
to pass-through businesses.

Under the U.S. tax code the profits (income) of publically
held or C-corps are taxed twice, first through corporate income taxes and then
again through personal income taxes on dividends and capital gains. Other
businesses – individually, family, or employee owned – are all eligible for
pass-through status, meaning that their income passes directly to their owners’
personal income tax returns, as are most partnerships (these businesses are not
necessarily small; there are nearly 1,000 of them in Oregon with over 100
employees).As a result, the owners (shareholders)
of C corps tend to pay higher tax rates on their businesses’ profits than do
the owners of other businesses. That is generally also true at the state
level. It is almost certainly the case in Oregon.

Consequently, pass-through businesses now account for more
than 50 percent of all business income in the U.S., triple what it was in 1986.
In fact, there are only about 3,500 large publicly traded companies in the
U.S., down from more than 5,000 in the mid-80s. This goes a long way to
explaining the relative decline in the importance of the federal corporate income tax vis
á vis personal income tax receipts.

The decline in the relative contribution of Oregon’s CIT is
proportionally less than in most states, especially places like Connecticut,
Louisiana, Michigan or Ohio, where real
corporate income revenues actually declined by more than 50 percent after 1990,
but it still looks to be significant (although, in reality, probably not, since
GM evidently excluded revenue from
turnover taxes from its figure – see my next post).

Others of our colleagues are more conspiratorially minded.
They tend to hold to an older view of corporate income taxes, which posits that
the incidence of the tax is entirely shifted to other, less mobile, factors of
production (labor and real property). Consequently, it follows that states
should not tax corporate income, that, to avoid adverse effects on investment,
output, and employment, it would be better to tax labor/land directly. While
this view cannot be entirely ruled out as a theoretical matter, it’s wholly inconsistent
with the best empirical evidence. For that reason, most tax economists now reject
it.

Nevertheless, it might be noted, that, under this view,
state elected officials choose to tax corporate income only because they are
forced to by popular sentiment ("I pay taxes, but big companies get away
Scot free?"). Bizarrely, some of those who hold this view assume a level
of rationality on the part of state tax authorities that beggars all belief:
they adopt high statutory tax rates to appease the public, but consciously
mitigate their effects through special tax breaks. Hence, one observes
persistent high state corporate income tax rates along with diminished
collections.

However, as the Governing Magazine. article clearly
shows, the scale of SCIT tax breaks is nowhere close to accounting for the
relative decline in SCIT revenues. If nothing else, that should put paid to
this particular conspiracy theory.

If I am right, tax avoidance/evasion is at the heart of the
problem of the mystery of declining SCIT revenue, what can be done about it? I
offer one answer in my next post.

Wednesday, January 20, 2016

On NPR this morning there was a report on an Amnesty International report on the child cobalt miners of DR Congo. Families can dig their own mines in mineral-rich DRC. Often, apparently, all or many members of the families take part in this household production, including children. The report suggests that this is a bad thing, that children should not be involved in mining and should instead be in school.

On the face of it, this all makes sense. Children are not old enough to make these decisions for themselves and society must protect them. Mining is a difficult and dirty task, not suitable for small children. School is where they should be.

But this ignores the fact that most parents in the world want what is best for their children and would prefer that they do not work. But if it comes to the stark choice of having the child work or not feed the family, families are forced send their children to work.

Ironically, by calling on Apple, Samsung and Sony to ensure no children are used in the mining of the cobalt used in their products might be condemning these families to a worse fate - making these kids worse off not better.

This was the point of a seminal paper by Basu and Van in 1999, only if, by banning child labor does the overall supply of labor decrease so much that adult wages rise enough to compensate, does a ban actually improve the welfare of the children. And if the local schools are poor - as they often are in rural parts of low-income countries - there maybe little benefit to sending children to them.

Much of my work over the last decade and a half studies the consequences of children working so I am acutely aware of the problem. Enough to know that calls to ban child labor, though well-meaning, are often misguided. I prefer focusing on investments in education and social safety nets to create a situation where families have enough consumption to survive and where sending kids to school is a good long-term investment. Besides, bans are often essentially toothless without real enforcement, something that low-income countries do not have the resources to do. Better to focus on the incentives that cause children to work in the first place.

Friday, January 8, 2016

Fred Thompson once again keeps the blog alive with another insightful piece.

Patrick Emerson and I have
written about the Kicker and its folly often here at the Oregon Economics
Blog. In what is otherwise an arguably exemplary state and local tax system,
Oregon’s kicker is an embarrassment, or, more correctly, the legislature’s
unwillingness to deal with it is simply shameful.

As it happens the kicker isn’t entirely unique to Oregon. At
least six other states – Colorado, Massachusetts, Missouri, New Hampshire,
North Carolina and Oklahoma – have “triggers” that automatically impose tax
cuts (i.e., give refunds, credits or a reduction in rates to taxpayers or
businesses) whenever cash inflows (real or expected) exceed planned outflows. Moreover,
Michigan’s Governor, Rick Snyder, recently signed a bill that will
automatically roll back personal income-tax rates whenever state revenue
exceeds 1.425 times the rate of inflation, although not until 2023.

All of these measures have a similar justification: the
widespread belief that governments are myopically imprudent, that when times
are flush they will spend like drunken sailors, thereby creating irresistible
pressures to raise taxes when times are tight to maintain otherwise unsustainable
current service levels. Moreover, automatic cuts are apparently politically
appealing. They promise tax cuts for voters, but grant them only when there is
enough cash to pay for the cut.

From this standpoint, Oregon’s kicker could be worse. It
goes into effect retrospectively, when actual cash inflows exceed the budget
forecast. In Oklahoma, the kicker is prospective, based on the revenue forecast
itself. This year Oklahomans, like Oregonians, will get a big refund.
Unfortunately, forecasts are not reality. Oklahoma’s actual revenues are insufficient
to cover both its budget and the automatic tax cut. Moreover, Oklahoma has a
very strict balanced-budget law. It must bring its cash outflows into line with
inflows during the current year and it is prohibited from borrowing (even from
itself) to do so. In this instance, the automatic trigger caused precisely the
problem it was supposed to fix.

Economies are
cyclical; revenues are too. That’s not necessarily a bug. The problem is
stabilizing spending, but, as the Legislative Task Force on Restructuring
Revenue and Governor Ted Kulongoski’s reset team recognized, the solution is
straightforward: avoid myopic imprudence, i.e., grow
spending at a sustainable rate, using saving and, when necessary,
borrowing, to smooth out spending. Were the legislature less pusillanimous,
repeal of the kicker law would allow this solution to be put into effect
without a foreseeable need for borrowing (actually, given my druthers, I would
base the revenue estimate on a sustainable, long-term growth rate, use the
kicker – revenues in excess of the estimate – to automatically pay down state
debt/build a sinking fund, and rely on borrowing whenever actual revenues dropped
below the revenue estimate, but that is a slightly different story).

It might be noted that
other states have found the political cojones to repeal automatic triggers.
According to Governing Magazine, the trigger
trend began in California, but was laid to rest during the Schwarzenegger
administration. More recently, thanks to their Governor Brown, California voted
Proposition 2 into law. Proposition 2 amends the California Constitution to
require that the Governor make mid-term spending and revenue targets part of
the state budget process, requires the state to set aside revenues each year –
for 15 years – to pay down specified state liabilities, and substantially
revises the rules governing the state’s rainy day fund. In other words,
California’s legislature did pretty much what Oregon’s has consistently refused
to do. They referred a measure aimed at making state and local spending
sustainable to the citizenry. On November 4, 2014, 70 percent of the electorate
voted in its favor. It is downright shocking when California exhibits greater
fiscal responsibility than Oregon.

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This blog seeks to comment on economic issues that matter to the state of Oregon. These issues may be local, state or national but in some way matter to Oregon and Oregonians. The goal of this blog is to eschew politics as much as possible and give an economist's perspective on economics and public policy as it relates to Oregon.

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